Bankers Bridle at Mortgage Rules

Lenders say new federal rules that stress a cookie-cutter approach to who qualifies for a mortgage are about to make it more difficult and time-consuming for many home buyers to get financing.

The rules, which take effect in January, are intended to ensure borrowers can repay their loans.

Certainly nobody wants a repeat of the mortgage lending excesses and irresponsibility that led to the financial crisis five years ago, bankers say. But they contend the standardized rules issued as part of Congress’ financial reform package are an overreaction that will make it tough for some loan-worthy consumers to get a mortgage — perhaps enough of them to affect the housing market recovery.

“This is going to really affect consumers,” said Thomas J. Pamperin, chief executive of Premier Community Bank in Marion, Wis., and chairman of the Wisconsin Bankers Association. “This is going to be a big deal.”

An industry analyst, however, says lenders’ fears about the new rules are overblown. While dealing with the rules probably will cause some delays in the mortgage application process until the industry gets used to the new ways, creditworthy people will be able to obtain mortgages, said Polyana da Costa, senior mortgage analyst for the personal finance firm Bankrate.com.

“I don’t think it’s as bad as many lenders make it sound,” she said.

One key concern of bankers is what the federal Consumer Financial Protection Bureau is calling a “qualified mortgage.” Under a rule that takes effect Jan. 10, a borrower’s debt expenses must be no more than 43 percent of total gross income to be eligible as a qualified mortgage. A qualified mortgage has the bureau’s “safe harbor” protection, meaning a lender is protected from lawsuits by homeowners who claim their foreclosure resulted from flawed underwriting.

The new rules say mortgages that exceed the 43 percent debt-to-income cap won’t have the stamp of approval by the Consumer Financial Protection Bureau and wouldn’t have the same legal shield if the loan ever went bad.

Mortgages underwritten to the standards of Fannie Mae and Freddie Mac and other federal agencies also will be considered qualified mortgages.

Bankers argue that a one-size-fits-all standard takes away their discretion regarding who is a good loan candidate and puts them at greater legal risk if they issue a mortgage to a consumer with a higher debt-to-income ratio than the government has deemed appropriate.

Pamperin said the rules don’t take into account that banks in many smaller communities know their customers and whether they can make their monthly mortgage payments — even if their debt-to-income ratio is greater than 43 percent.

“There’s a lot of people who are self-employed. There’s a lot of people who make their living from the land in some manner. When you start talking about income . these people really know how to make a dollar go a long way,” Pamperin said. “So when there are rules that come out that say, ‘We know what people need to spend on housing,’ it’s difficult for these people to understand that somebody in Washington is making the decision as to who’s going to qualify for a mortgage.”

The financial condition of borrowers will receive more scrutiny as lenders attempt to make sure debts and income are what borrowers say they are, bankers say. That’s likely to slow the process of obtaining a mortgage.

“Right now we’re turning over boulders in someone’s history,” said Michael Kellman, senior vice president for consumer credit sales at Brookfield, Wis.-based North Shore Bank. “Now we’re going to be turning over every pebble.”

Lenders aren’t required to comply with the 43 percent debt-to-income standard. But they note that in addition to forfeiting the Consumer Financial Protection Bureau’s legal shield, making loans outside the new rules probably would subject them to more analysis from bank regulators during exams. If nonqualified mortgages are judged riskier by examiners, banks could have to put more money into reserves to cover potential bad debt — a move that cuts directly into a bank’s bottom line.

Under the new rules, qualified mortgages — called QM in the industry — can’t be interest-only loans or have balloon payments, can’t have a term longer than 30 years, and can’t have points and fees that amount to more than 3 percent.

Brian Wickert, president of Accunet Mortgage in Butler, Wis., pointed out some consequences of the rules.

“Ironically, one of the unintended consequences of the new QM rules is that it will make it difficult and in many cases impossible to provide smaller mortgages — say, in the $30,000 to $40,000 range — because of the fee limit,” Wickert said. “The irony is that the QM rules are intended to protect the ‘little guy,’ but it will prevent some borrowers with modest loan balances from getting mortgages, or at least reduce their choices.”

Wickert said that on the other end of the lending spectrum, higher income, higher net worth borrowers no longer will be offered interest-only loans from most lenders because they won’t be considered qualified mortgages.

“An interest-only loan is a terrific tool for higher-income, higher-net-worth individuals who want to maximize their tax-deductible mortgage interest,” Wickert said. “I’m afraid the government threw the baby out with the bath water on that part of the rule. Certainly, interest-only loans were not appropriate for homeowners with 5 percent equity, but with 30 percent equity, which is the current rule for another couple of weeks, I believe they’re perfectly acceptable.”

Bankrate’s da Costa said she doesn’t anticipate the new rules resulting in a lot of change.

“I think the new rules won’t affect the majority of borrowers who are applying for a mortgage next year,” she said. “Part of the reason for that is that lending standards have already tightened since the financial crisis. The way I look at it is the rules that are going into effect next year, they weren’t necessarily created to tighten the current standards that we have now because they are already tight. But mainly they were created as an effort to prevent lenders from loosening up the standards that we have today — from loosening them up too much during the next housing boom.”

Nonqualified loans will occur, she said.

“Even though you hear lenders say they won’t lend outside of QM, they will,” da Costa said. “The more lenders that do it, the more will follow. Especially in the jumbo market, where they are dealing with bigger loans and wealthier clients, there’s no question they are going to lend outside QM at some point.”